Looking up from silver 'crash'

Collapse of the silver bubble may be good news for America's economy. Legislative and regulatory agencies now investigating the episode think it shows that the brakes of high interest rates are finally curbing inflation.

What happened in silver was stunning. The billionaire Hunt brothers from Dallas -- Nelson Bunker Hunt and W. Herbert Hunt -- ran the price of silver up from around $6 an ounce early in 1979 to $50 an ounce in January while they and Saudi allies held a reported 200 million ounces.

Then the price cracked. It is now back down to around $12 an ounce.

Gold, copper, and certain other minerals declines, too. Harold Williams, chairman of the Securities and Exchange Commission (SEC), and chairman James M. Stone of the Commodity Futures Trading Commission tell Congress they are looking into the possible need for tighter regulations.

Meanwhile, the prime interest rate of one New York bank rose to the extraordinary figure of 20 percent. It was the high cost of borrowing money that helped prick the silver price bubble.

The Chemical Bank of New York raised its prime interest rate to 20 percent, April 2, after Chase Manhattan boosted it to 19 3/4 the day before. Wall Street had talked about "20 percent money" for months. Does this end the cycle?

Some think the silver collapse may be a signal. Federal Reserve Board chairman Paul A. Volcker has been fighting inflation for months with a tight money, high interest policy, i.e., making speculators, businessmen, and the general public pay more for borrowing. This is the harsh but effective way of curbing inflated prices, now rising at the unacceptable annual rate of around 18 percent.

The difficulty with this policy is that it brings recession before it restores prosperity.

Sen. Lloyd Bentsen (D) of Texas, chairman of the Joint Economic Committee, and a group of fellow Democrats introduced proposals April 2 for an alternative anti-inflation program with more emphasis on the "supply" side, in other words, to stimulate production.They include incentives in the form of lower taxes to induce firms to modernize plant and machinery, currently lagging behind other countries.

Signs here indicate that the economy may be turning the chapter from inflation to recession, pushed by the same high interest rates that helped block the silver corner.

The Hunt brothers blame the silver collapse on "over-regulation" and "unrealistic margin requirements." They do not get much sympathy either in Washington or New York. The Wall Street Journal editorializes that it is "fortunate and instructive that the first and most spectacular victims of the money tightening are a couple of high-rolling Texas billionaires."

What causes concern among Washington regulators is the connection between the Hunt silver consortium and the big New York brokerage house of Bache Halsey Stuart Shields Inc. Trading in the Bache stock was suspended, March 27, in the critical few hours when the Dow index of industrial stocks plunged 24 points and when Washington officials were alert to a possible "panic" (a domino chain reaction of firms unable to meet debts on margin.) Officials still shudder at what some regard as a near meltdown.

The Hunt brothers own a minority interest in Bache. Congressional investigation has so far disclosed no favoritism, legal or illegal, in the relationship. In the frantic hours of March 27, the Hunts were unable at one point to put up more collateral, and Bache sold millions of its own funds to carry the transaction. SEC chairman Williams told Congress that regulations may be needed to safeguard other shareholders when a brokerage firm in carrying on huge transactions with a single shareholder.

As to the new 20 percent interest rate, it is noted that it is twice the level of October 1978. Rate escalation is "reaching a culmination," one official said.